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Moody's downgrades McGraw-Hill citing lawsuit

NEW YORK (AP) -- Moody's Investors Service on Friday downgraded The McGraw-Hill Cos., citing the company's plans to sell its education business and the lawsuit filed by the Department of Justice against its Standard & Poor's credit rating agency.

Moody's lowered McGraw-Hill's senior unsecured rating to "Baa2" from "A3." Both ratings are considered to be "medium grade," but Baa-rated investments are considered by Moody's to have some speculative elements. The outlook is negative.

The move came a little more than a week after Fitch Ratings, another rival credit rating agency, also downgraded McGraw-Hill and put its ratings under review for additional downgrades, pointing to the lawsuit.

Moody's said that McGraw-Hill will lose significant profit and business diversity as a result of the pending $2.5 billion sale of its education business to investment funds managed by affiliates of Apollo Global Management LLC.

Meanwhile, a bad outcome to the lawsuit could significantly affect the company's credit profile, while management's focus and the direct costs related to S&P's defense could be a drag on the company's operations for some time, Moody's said.

S&P said earlier this week that it's prepared to spend years beating back the lawsuit. On Friday, McGraw-Hill declined to comment on the Moody's downgrade, but said its finances remain strong, touting itself as a high-growth and highly profitable company.

"Overall, we have a strong balance sheet and we intend to maintain it going forward," McGraw-Hill said in a statement.

The government said in its complaint against S&P that it may seek up to $5 billion in fines and penalties — several years' worth of profits for McGraw-Hill. The company believes the charges lack merit, but said it expects the case to drag on for three or more years.

Experts have said that the lawsuit against S&P could serve as a template for future action against Fitch and Moody's. High ratings from the three agencies, particularly on mortgage-backed securities, made it possible for banks to sell trillions in risky investments. Some investors, including pension funds, can buy only securities that carry high credit ratings.

McGraw-Hill's stock was unchanged at $44.86 in afternoon trading. The stock is down 18 percent so far this year.